Wednesday,24 April, 2019
Current issue | Issue 1294, (5 - 11 May 2016)
Wednesday,24 April, 2019
Issue 1294, (5 - 11 May 2016)

Ahram Weekly

Securing Egypt’s wheat

Wheat is one of the most important components of Egypt’s food security, but there has been an array of problems affecting its supply, writes Hayat Hussein

Al-Ahram Weekly

Egypt is the biggest wheat importer in the world, with a recent study by the UN Food and Agriculture Organisation (FAO) saying that wheat is particularly important for the country given the role it plays in feeding Egypt’s burgeoning population. Around a quarter of Egypt’s population lives under the poverty line, meaning that bread is the major source of daily calories and a staple of the Egyptian diet.

This may be one of the causes of the broad set of health problems that has afflicted the population in recent years, also placing a burden on the health system. However, it does not appear that wheat consumption varies among the different segments of the population despite the diversification of Egypt’s diet in recent decades.

When Egypt buys or does not buy wheat, the amounts involved are large enough to have an impact on prices on the global commodity markets. Egypt currently produces some four million tons of wheat and imports another six million. In mid-March, for example, Bloomberg reported that Russia, a major global provider of wheat, had been losing its competitive edge after losing three Egyptian wheat tenders to Romania, France and Ukraine due to the stronger rouble following the slight recovery in oil prices.

The news service said that Russia had been expected to be the biggest global exporter of wheat this year, having dominated the Egyptian market for the last eight months. As the biggest wheat importer in the world, Egypt is seen as a trendsetter for global demand. And Bloomberg cited data from the Institute for Agricultural Market Studies (IMS) in Moscow showing that the price of Russian wheat had dropped to a five-year low in the second week of February. Despite an increase in wheat futures in Paris in recent days, delivery contracts were down 11 per cent in March.

Dmitry Rylko, director of the IMS, said the prices were “extremely discouraging” and added that the Russian exporters’ failure to win new Egyptian tenders might affect the country’s projected exports. But competition from other countries offering lower wheat prices is not the only cause of declining Russian wheat exports to Egypt. The latter has reduced its imports from all states and has sent back several shipments that contained the ergot fungus, certain levels of which are banned in wheat.

In January, the Ministry of Agriculture and Land Reclamation announced that it would not permit the import of wheat shipments containing any traces of ergot, saying that wheat imports must meet the strict Codex international food standards promoted by the FAO. In a statement, the ministry said an agreement had been concluded between the ministries of agriculture, supply and health, as well as the import and export regulatory agency, to enforce the standards.

Cairo rejected several wheat shipments containing traces of ergot, including a French shipment that stayed at sea for 45 days after it was turned away from Egyptian ports. “The Ministry of Agriculture and the UN Food and Agriculture Organisation agreed to swiftly dispatch an expert from the organisation to analyse the dangers of the ergot fungus for wheat and negotiate with all competent parties,” the statement said.

However, a week later the ministry backtracked and announced that Egypt would permit the entry of wheat shipments that contained trace amounts of the fungus of no more than 0.05 per cent. “It has been decided to maintain this percentage without change after consultations with the Ministry of Agriculture,” said Mahmoud Diab, a spokesman for the Ministry of Supply in Cairo.

The ergot fungus can cause illness in both humans and livestock if ergot-tainted grain or bread made from tainted flour is consumed. The fungus can cause headaches in humans and spontaneous abortions in women. If it is consumed on a consistent basis, it can affect the liver and may even cause cancer over the long term. It can cause miscarriages and cancer in livestock as well.

Although both the Agriculture and Supply ministries announced that they would allow trace amounts of ergot in imported wheat, the crisis continued for several weeks after several sectors in the Ministry of Agriculture refused to comply with the directives. As a result, the ministers of supply and agriculture held a joint press conference in February to affirm that they had agreed on permissible trace amounts of ergot, without addressing rumours of the alleged health effects.

“The ergot crisis was just a media uproar due to conflicting reports in various media outlets,” Diab commented to Al-Ahram Weekly.

WHEAT AND THE DOLLAR: Egypt is currently facing a severe dollar crunch due to the sharp decline in sources of foreign currency, such as tourism, seriously damaged by the crash of the Russian jet in Sinai in October.

The death of Italian researcher Giulio Regeni, found in Cairo earlier this year showing signs of having been tortured, made matters worse. Tourism in February this year was down 46 per cent from the same month last year, with a particularly large drop in Russian tourism, according to figures from the Central Agency for Public Mobilisation and Statistics (CAPMAS).

Direct foreign investment is also down, despite pledges by Saudi Arabia and the UAE to pump billions of dollars of investments into Egypt. According to Egypt’s Central Bank (CBE), foreign direct investment is down 34 per cent this fiscal year on the previous year, while remittances from Egyptians abroad have dropped by $1 billion in the first half of the current fiscal year, reaching $8.3 billion. Suez Canal revenues have also declined since the new canal was inaugurated in September.

The shortage of dollars has prompted a sharp increase in the price of the dollar on the black market, one of the most significant sources for importers. While the official exchange rate sets the dollar at LE8.8, on the black market the price has crossed the LE12 mark. After the UAE announced that it would deposit $2 billion in the CBE, bringing Egypt’s foreign reserves to $18.5 billion, the price of the dollar on the black market was still higher than LE10.50. There are indications that it could continue to climb, especially since Egypt is scheduled to pay $1.8 billion before July to Qatar.

Since Egypt is the world’s biggest wheat importer, the shortage of foreign currency naturally has had a negative impact on imports. These were noted by Western traders during the ergot crisis, according to Reuters, with one telling the news agency that “the GASC [General Agency for Supply Commodities] is acting unwisely on the ergot issue, as they already have enough problems with delays in opening letters of credit without introducing other issues into the supply chain that could cause disruption.”

In its January story, Reuters reported that the ergot standards could pose another obstacle for importers in the Egyptian market, who had recently faced delays in letters of credit and consequently had had their shipments suspended pending payment. In a statement, the GASC said that the delays, which had caused a hold up in the delivery of 180,000 tons of French wheat, would be resolved soon.

GASC Vice-Chairman Mamdouh Abdel-Fattah said the delay was an administrative matter that “has nothing to do with liquidity.” When a government tender is won, the company selling the commodity typically requests a letter of credit for payment at a government bank in Egypt, later confirmed by the bank with which the company deals. According to the FAO study, Egypt’s growing population and weaker national currency means that the cost of the government’s bread subsidy programme has also increased, now amounting to some 0.8 per cent of GDP.

LOCAL WHEAT: In mid-April, local wheat growers began delivering their harvest to the Ministry of Supply’s grain storage facilities at a price of LE420 per ardeb, a measure of grain equivalent to some 150 kg.

This coincided with protests by farmers in various governorates against a decree from the Ministry of Agriculture requiring them to prove possession of their land before their wheat would be accepted and insisting that desert and mountain land be formally zoned and recognised. The new requirement caused crowding at storage facilities, delaying the intake of grain and sparking an increase in transport costs.

Walid Raslan, a wheat supplier, told the press that “the minister of agriculture’s decree linking the receipt of crops with proof of possession is flawed. Officials at mills should take a random sample from every farmer to examine the quality of the wheat, and delivery should not be linked with possession. Much reclaimed mountain land is not formally possessed by anyone.”

Minister of Supply Khaled Hanafi responded to the protests by telling the press that he and the minister of agriculture would discuss facilitating matters for farmers without formal agricultural holdings to enable them to deliver their wheat. He added that a main operations room had been created at the ministry along with standing operations rooms in all the governorates to monitor supply operations, offer accommodations to farmers, and resolve any obstacles they might face.

But the issue of formal agricultural holdings is not the only problem threatening the supply of local wheat. The first and second Sherif Ismail governments were a source of intense frustration for farmers, after the cabinet instituted a new wheat system at the beginning of the current season. Under the new regulations, a subsidy of LE1,300 is paid for every feddan of land, to a maximum of 25 feddans, while linking supply prices to global prices of wheat.

“The new system benefits small farmers,” Hanafi said, trying to win over small farmers to the new system with his statements. Since the land reforms instituted by the late president Gamal Abdel-Nasser, agricultural land ownership in Egypt is often extremely fragmented, with many holdings not exceeding half a feddan.

According to Hanafi, 3,108,199 farmers are eligible for subsidies. 3,343,641 feddans are planted with wheat, and of these 3,025,161 are eligible for subsidies, or about 91 per cent of all holdings used to grow wheat.

The government has linked local wheat prices with global prices to minimise its subsidy burden, after global wheat prices declined in recent years compared to domestic prices.  According to the FAO, in 2014 the Egyptian government paid the equivalent of $84 per ton of local wheat, which is more than the global price, meaning it spent $350 million more than it would have done for the same amount of imported wheat. Nevertheless, the government rescinded the decree under pressure from farmers and some parliamentarians, who saw it as a possible death knell for local wheat.

Advisor to the Ministry of Supply and former head of the GASC Nomani Nomani previously told the Weekly that buying wheat on the local market at higher prices was a significant way of addressing the dollar shortage, but some traders had delivered imported wheat to the ministry as domestic wheat in order to take advantage of price differentials.

IMPORT PROBLEMS: The warnings issued by Nomani more than two years ago have now come to pass, and according to a Reuters report published a few weeks ago, low wheat supplies have encouraged fraud and corruption.

The Ministry of Supply said last June that due to the strong wheat harvest, the government had brought a record 5.3 million tons of local wheat, up 3.5 million tons over the past few years. But traders and mill owners say the local crop was not in fact better than usual. According to them, about two million of the 5.3 million tons the government said it had purchased, had been imported or existed on paper only.

Several traders, mill owners, and former ministerial advisors who requested anonymity also told Reuters that companies had sold imported wheat to the ministry as Egyptian wheat, in order to get the better subsidised price. The official government price is $370 for a ton of local wheat, according to government statistics, or $150 higher than the global price.

Hisham Suleiman, CEO of Medstar for Wheat Imports and Trade, said he had submitted a complaint to the CBE, saying that the data on local crops was inaccurate, which made it difficult for private companies to determine the size of demand and plan for future imports. He said a harvest of the size published by the ministry had not been seen in 30 or 40 years.

Waleed Diab, a member of the board of Egyptians Millers, one of the big three milling companies in the country, said that the Ministry of Supply tolerated corruption in the current system in order “to cover up for the decrease in strategic reserves.” Sources estimate that local suppliers make about LE2 billion (the equivalent of $255 million) out of selling imported wheat to the ministry as local wheat.

This season, the Ministry of Supply has banned the transport of local wheat between governorates except with the permission of official bodies. It has said that local supply departments will tighten up their oversight of all stages of the local wheat supply chain to protect public money and prevent imported wheat from being sold as or mixed with local wheat.

Another issue that has complicated Egypt’s wheat system has been the smart card system introduced in 2014 in part to stop the leakage of subsidised wheat into the market. Previously, some bakery owners would illegally sell much of their allotment of subsidised flour on the open market, using only part of it to produce bread at subsidised prices.

The government says the smart card system has been a success in dealing with such abuses, saving millions of dollars on bread subsidies, limiting imports, and ending the shortages that had led to bread lines around the country. Hanafi had earlier told journalists in late 2014 that in that year nearly 50 per cent of the country’s subsidised flour supplies had been pilfered.

In December last year, he told Reuters that the new system had saved more than LE6 billion, or $766 million, on the costs of flour. Under the new system, flour is sold to bakeries at the market price. Production costs and profit margins are paid, and the state then purchases the bread for those with subsidy smart cards.

Diab told the Weekly that the new system had reduced Egypt’s wheat imports by 1.9 million tons in fiscal year 2014-15 to just 6.4 million tons. The system of bread points has also cut bread consumption, since beneficiaries who do not claim their allotment of five subsidised loaves of bread a day can use the remaining points to purchase other goods, such as cooking oil and beans.

However, people in the industry say the reforms have failed and have made a bad system even worse. Eight sources in the wheat industry told Reuters in mid-March that the smart card system could be hacked, allowing some bakers to fake receipts and acquire more subsidised flour than they actually sold. One critic of the smart cards system said that instead of reducing the amount of wheat supplied by the state to traders it had in fact increased it. It had sparked a wave of higher-level fraud, he said, which critics say could cost the country hundreds of millions of dollars a year.

Data on the consumption of state-subsidised milled wheat shows that it increased early last year in 12 out of 19 governorates after the smart card system went into effect.

Statistics also show that 955,000 tons of subsidised flour were consumed in February of last year, up from 750,000 tons in February 2014. The government has recognised the problem, saying it is “minimal” and is being addressed. However, the additional consumption early last year put a drain on government wheat reserves.  

Under the new system, each eligible family receives a plastic card allowing it to buy five loaves of subsidised bread a day for each family member. Families must swipe their cards each time they go to a bakery to allow the Ministry of Supply to track the quantity of bread sold at each outlet. The government then pays the bakery for each loaf of bread sold.

However, the smart card system used by the ministry to track the amount of bread sold has been manipulated, and many bakeries have sold flour on the black market. While the minister of supply has acknowledged the problem, he has denied the figures reported by Reuters, telling the Weekly that “reduced imports are the best evidence of the falsity of this information.”

Nevertheless, the Finance Ministry said in a statement a few weeks ago that spending on supply commodities, including bread, had increased by more than LE4 billion, reaching LE20 billion in the first half of the current fiscal year.

THE PRIVATE SECTOR: The FAO has advised the government to permit more private-sector involvement in supplying wheat, saying that it could offer several benefits.

“It means the government could realise significant cost savings by relying on the private sector to a greater extent,” the FAO said. “By liberalising its procurement system, the government can reduce the high cost of wheat procurement (both domestic and imported), reduce the level of losses from domestic storage, save on the cost of port storage and reduce losses of wheat and flour during milling, while increasing the quality of baladi [local] bread.”

But there are several obstacles to greater private-sector involvement, both local and foreign, in the Egyptian wheat market, it noted. “In the first place, it is not easy for small and medium-sized Egyptian private-sector grain suppliers to compete with state-owned enterprises as they face uncertainties related to unfavourable market conditions, unpredictable actions by the state, and the need to borrow capital at financial market rates, amongst others.”

The FAO noted that there were institutional barriers to effective private and public-sector communication as well, since private grain-trading and storage companies are not represented in the existing chambers of industry, impeding dialogue between the private sector and the government. “It is critical to address these barriers to the more active involvement of the private sector,” the FAO concluded, “if a more sustainable and efficient wheat sector is to emerge in Egypt.

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